Fiscal Cliff Deal Allows Giving IRA Assets To Charity

Act fast: the fiscal cliff deal has a special tax break for cash donated by seniors to charity in Jan. 2013.

It's a variation on the so-called IRA charitable rollover--an on again, off-again rule, first introduced in 2006, that allows people 70½ and older to transfer as much as $100,000 per year from their traditional IRAs to charity. The provision last expired at the end of 2011. In the tax deal enacted this week, Congress has extended it through 2013, with a brief window of opportunity for 2012 donations.

Unless an IRA is a Roth, the account owner must take yearly minimum required distributions starting at age 70½ and pay tax on the withdrawals. (See “Four IRA Deadlines Every Smart Investor (Or Advisor) Should Know.”) With the charitable IRA rollover, as it is called, the donation can count against the minimum required distribution they would otherwise be required to take.

Here's how this must usually be done: Instead of taking money out of an IRA, the owner asks the custodian of the account to send a certain sum directly to charity.

This posed a logistical problem for people who wanted to make 2012 donations of IRA assets, since annual minimum required distributions had to be taken by Dec. 31 of that year. (For the ultra charitably inclined, I described a workaround here.)

Under the circumstances, Congress carved out a compromise for 2012 donations. Unfortunately, it only applies to taxpayers who delayed taking their IRA distributions until December. And they must act quickly now. If they donate cash to charity between now and Jan. 31, they can have it count to satisfy all or part of their 2012 minimum required distribution.

Words to the wise for 2013, donations, however: You must do it the usual way – by asking the IRA custodian to send the distribution directly to the charity, rather than funneling the money to charity yourself.

Charities, unlike individual beneficiaries, do not need to pay income tax on withdrawals from these accounts. And while there is no income tax deduction for a donor’s contributions, the sum going to charity is not included in his or her adjusted gross income. (The advantage of this is that the older donor isn’t subject to percentage limitations on charitable deductions and may be able to avoid certain penalties that come with a higher AGI, such as higher Medicare premiums.)

IRA funds donated this way can not be used for contributions to donor-advised funds, supporting organizations or private non-operating foundations. Subject to those constraints, the money can go to any organization to which you can make a gift that would qualify as a charitable deduction on your tax return.